Stay current with our daily newsflash.

AIG's Mortgage Fraud Lawsuit with Bank of America Continues in Federal, State Court

A federal judge in California has denied American International Group Inc.'s request to put its mortgage fraud lawsuit with Bank of America Corp. on hold while a similar action moves forward in New York state court.

U.S. Judge Mariana R. Pfaelzer denied AIG's motion to stay the case, but confirmed that AIG has standing to bring claims for the residential mortgage-backed securities that were sold to Maiden Lane II, a special purpose vehicle the government used to take on AIG's toxic assets during the 2008 bailout of the then-troubled company.

As a result of the court's decision, AIG is able to pursue its full damages claim against Bank of America, AIG spokesman Matt Gallagher said.

In April, the Second Circuit Court of Appeals ruled AIG's mortgage fraud lawsuit should be heard in New York state court.

AIG and Bank of America have been fighting over whether AIG's 2011 lawsuit should be heard in state or federal court. AIG sued Bank of America for $10 billion, alleging the bank knowingly engaged in misconduct when selling thousands of defective residential mortgages. Those mortgages, which backed securities, experienced "unprecedented" rates of defaults and foreclosures, which in turn affected the securities when the market collapsed in 2008, according to AIG's complaint.

When AIG faced the liquidity crisis, the U.S. government stepped in with a bailout that allowed AIG to transfer residential mortgage-backed securities with a face value of $39.3 billion to Maiden Lane II, a special purpose vehicle controlled by the Federal Reserve Bank of New York, for $20.8 billion.

In related litigation, Bank of America settled with the Federal Reserve of New York for an undisclosed amount. At issue in that case is who owns the right to sue over $18 billion in residential mortgage-backed securities that AIG bought, securities that led in part to AIG's 2008 liquidity crisis that sparked a federal government bailout. Under the terms of its settlement with Bank of America, the New York Fed agreed not to sue on any of the tort claims that AIG seeks to advance, according to court papers.